Tuesday, January 21, 2014

PAN and KYC Challenges of Stock Broking Firms

Stockbroking business in India is facing various challenges due to the global slowdown, low industrial growth, high inflation, coalition government etc. Amid all these challenges they are facing other regulatory hurdles from the SEBI (Securities and Exchange Board of India). The most important among them is the mandatory PAN card norm. As per regulation from SEBI, every customer of a broking firm should have a PAN card.  What does this mean to the broker?
This means the total customer base the broker can try reaching with their product is just 7% of the total population in India as only 7% of the population has a PAN card. If they want to add anyone outside that 7%, the sales team would have to help the customer go through the entire process of getting a PAN.  Apart from this strict KYC (Know Your Client)  norms are also making things slow. One initiative taken by SEBI to improve the KYC efforts was the introduction of the KRA - KYC Registration Agency. KRA is an independent agency or agencies that provide centralization of the KYC records in the securities market. The broking firms are supposed to perform the initial KYC and upload the details on the system of the KYC Registration Agency (KRA) within 10 days. So once the client has done KYC with a SEBI registered intermediary, he/she need not undergo the same process again with another intermediary.  But the reality is more than 90% of cases of new customer falls outside the KRA database. The presence of multiple inter-operating KRAs can result in issues of failed communication between them causing confusion and hardship for the investors and brokers alike. This all leads to a very high customer acquisition cost, close to 7000 RS per customer.

The question is, is it possible to remove PAN as a mandatory requirement for investing in equity markets? At least for investments less than Rs 50,000 per year which is the limit set for Mutual Fund investments. Long-term gains in equity investment are not taxable so tax-wise, the use of PAN comes in ensuring the collection of short-term gains taxes. The security transaction tax is collected directly at the time of transaction itself so the PAN might be used for booking purposes.

The probable season for PAN being mandatory is that there are no other identity proofs that are at the national level except Passport, which again is more complex than PAN. With the introduction of Aadhaar cards now we have a new national level identity and address proof. SEBI has recently cleared to use Aadhaar for eKYC. So let's hope more welcome changes will come in this area which will help to improve the market penetration of stockbroking business which in much need of a shot in the arm to keep it going.